Heterogeneous overreaction in expectation formation: Evidence and theory

Heng Chen, Xu Li, Guangyu Pei and Qian Xin

Journal of Economic Theory, 2024, vol. 218, issue C

Abstract: Using firm-level earnings forecasts and managerial guidance data, we construct guidance surprises for analysts, i.e., differences between managerial guidance and analysts' initial forecasts. We document new evidence on expectation formation: (i) analysts overreact to managerial guidance and the overreaction is state-dependent, i.e., it is stronger for negative guidance surprises but weaker for surprises that are larger in size; and (ii) forecast revisions are neither symmetric in guidance surprises nor monotonic. We organize these facts with a model where analysts are uncertain about the quality of managerial guidance. We show that a reasonable degree of ambiguity aversion is necessary to account for the documented heterogeneous overreaction pattern.

Keywords: Overreaction; Expectation formation; Managerial guidance; Asymmetry; Non-monotone; Ambiguity aversion (search for similar items in EconPapers)
JEL-codes: C53 D83 D84 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:218:y:2024:i:c:s0022053124000450

DOI: 10.1016/j.jet.2024.105839

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